China angered by NK move to usurp Chinese mining company

Over the last one and a half months, the outside world has been exposed to a rather unusual sight, that of China and North Korea (or rather a large Chinese company and the North Korean government) openly quarrelling.

It has always been an open secret that China and North Korea are not really friends – they have never been – nonetheless, for decades, mutual displeasure and frequent feuds were kept safely out of sight of outsiders. This time, this rule was broken and the dirty linin is there for all to see. This event might be less significant than it appears, but nonetheless it is interesting.

The quarrel began in early August when the Xiyang Group, a large mining company based in Liaoning, published an unusually angry statement about its sorry experience working with North Korea. As a matter of fact, they were complaining about things which have for decades been well known to adventurous foreigners brave or naive enough to deal with North Korea – absurd regulations, paranoia about security, officials demanding bribes and, above all, a very hostile takeover of a seemingly successful project.

Xiyang Group signed an agreement with North Korea in 2007. The group proposed that they would construct a large mine to extract deposits of low-grade iron ore. This was not an easy task.  Citing security considerations, North Korean officials banned taking of large samples to China for testing. Chinese engineers and workers had to be escorted by security personnel when they went to buy food, and they could not venture more than two kilometres away from the mine. At any rate, in early 2011, the mine became operational and Chinese engineers began to train North Korean personnel.

Once the project was operational and had a reliable local workforce in place, the Xiyang Group received a word from the North Korean side that the contract was to be significantly revised (even though the initial certificates and contract said that the contract’s basic conditions would remain unchangeable for thirty years). Among other things, the new conditions included to a natural resource fee equal to 4-10% of sale prices, large water use and land lease fees and a nearly 700% increase in the salaries paid to North Korean workers (the wages would go not to the workers however, but directly into the state’s coffers, as is customary in North Korean joint ventures).

Xiyang Group did not bow to these demands as they saw them as a blatant attempt by the North to steal the project just as it was becoming successful. So the North Koreans decided to drive the Chinese out by force. In February 2012 they cut off water and electricity to accommodation of the Chinese experts. Finally, on March 7^th 2012, North Korean police took over the Chinese residence and proceeded to put the Chinese employees of Xiyang on buses and send them to China.

After some negotiations (the Chinese embassy was much involved), the Xiyang Group decided to go public and publish their experiences in North Korea. Among other things, they catalogued the bribes that had been involved in the business, especially the notorious Ri Seong-kyu, the head of the operations on the North Korean side (and likely the person who stole the company for himself).

Xiyang claimed that on several occasions, he demanded monetary rewards as high as $100,000, and even demanded they pay for his new American Hummer. According to Xiyang’s account, Comrade Ri and his associates also expected their travel expenses to be paid for by the Chinese, and these expenses were quite high since they included not only large quantities of alcohol, but also the services of local prostitutes. The Xiyang Group’s statement was indeed especially vitriolic with regard to Comrade Ri, they did not even forget to mention that the North Korean functionary-cum-businessman weighs 108 kilograms and is very good at devouring expensive Chinese delicacies: “Everybody knows North Korea is suffering grain shortages and ordinary people do not have enough to eat, so North Koreans are quite thin but Ri Seong-kyu’s unusual fatness fully reveals what a luxurious life he leads”. Well, this is hardly unusual, since North Korea is a country where the visual signs of a very high calorie intake are indeed marks of distinction for the elite.

As a result these expenses and much more significantly, the investment in the project itself, the group has lost around $55 million.

When this angry statement appeared on the Xiyang Group’s website, it immediately attracted much attention both in China and overseas. It is widely believed that a well-connected Chinese company (and a mining company in China has to be well-connected) would not make such an issue public without at least implicit (if not explicit) approval from the government. Therefore it seems that the Chinese government wanted to send a warning to the North Korean government, and also supported the claims made by the Xiyang Group itself.

But the North Koreans are not known for their softness, and Pyongyang has subsequently attempted to rebut the claims of the Xiyang Group. On September 5^th, the Korean Central News Agency (KCNA) published a statement denouncing the Xiyang Group. It is important that the KCNA is North Korea’s official news agency, and for all intents and purposes the voice of the government.

The KCNA accused the Chinese company of colluding with hostile forces and spreading malicious propaganda. Without being too specific, they essentially denied all the charges while still hinting that some problems might have been present, but should be sorted out with the spirit of cooperation. They also said that the Xiyang group has no right to be so righteous because it had failed to carry out its part of the agreement. According to the North Korean statement, the actual investment was only half what was initially promised.

Xiyang’s leadership is obviously very angry and has not therefore remained silent. The following day (6^th September), a Xiyang group spokesperson spoke direct to Reuters and did not merely reiterate the claims initially made on the Xiyang groups website, but also made a number of highly critical remarks about the North Korean state and the controversy. Wu Xisheng, vice general manager of Xiyang , said once again that the North Koreans “cheated” and added: “This isn’t just about us – it is about all companies investing in North Korea”.

In the Reuters interview, he was mildly critical of the Chinese government position as well. He said: “The Chinese government can do nothing – it is thinking more about political stability” (a pretty good summary of  Beijing attitude to the North Korean issue).

What should we, as outsiders, make of this unusually public quarrel? First, there is little doubt that the Chinese company’s statement was issued with the prior approval of the Chinese government and it should therefore be seen as a signal to Pyongyang. This does not mean, however, that it is a sign of coming changes in China’s attitude to North Korea.

North Korea is a high-risk business environment and many foreign investors have been cheated there before – and in the recent decade or so, most of these victims happened to be Chinese. Nonetheless, this has not stopped China from providing North Korea with moderate, but important aid, which has been instrumental to North Korea’s survival in recent years.

From China’s point of view this is a sound policy – Beijing wants neither the disintegration of North Korea, nor its unification under South Korean control, but rather prefers to keep the status quo.  It is also willing to bankroll the preservation of this status quo – by providing North Korea with aid grants, as well as by encouraging Chinese businesses to deal with North Korea, even though the business environment is quite dangerous and potential returns are not all that high. This policy is rational and has been maintained for some fifteen years, so it is hardly going to change just because yet another Chinese company was cheated out of money.

Nonetheless, the decision to go public may indicate that the Chinese have decided that enough is enough. They want it seems to show to Pyongyang that cheating – at least large scale cheating – is not something they can commit with impunity.

This message might be particularly important as the new North Korean leadership is desperately looking for new sources of investment and funding. The decision to realise information about the Xiyang affair was clearly made just before Chang Song-taek, the top advisor to the new young leader and probably the actual man in charge, visited China looking for investors. He came back empty-handed and this may just be related to the Xiyang fiasco. China probably does not want to right North Korea off, but it clearly wants North Korea to understand: in order to attract Chinese private investment, North Korean officials must learn how to honour their obligations.